IKEA - another symptom of Russian commercial dysfunction

The clearest indictment of Russia’s investment climate came a few days ago from IKEA, a Swedish retail chain, whose local operation has grown quickly since it opened its first store near Moscow in 2000. On June 23rd IKEA said it was suspending its investment in Russia because of the “unpredictable character of administrative procedures”, a euphemism for graft. A symbol of Russia’s economic rebound from the 1998 financial crisis has become an emblem of its dire investment climate.

Among 181 countries surveyed by the World Bank for ease of doing business, Russia occupies 120th place, below Nigeria. Transparency International gives Russia barely two points out of ten—its worst performance in ten years, which puts it on a par with Kenya. Until recently the Kremlin had no need to worry about things like property rights and the rule of law. Its oil wealth ensured an economic boom, no matter how it treated investors. Most of the money that flowed into the country came in the form of loans rather than foreign direct investment.

Now the loans have dried up. The Russian economy is forecast to contract by 8.5% this year, an especially dire performance by the standards of the so-called BRIC countries (the others are Brazil, China and India).

Ironically Russian non-energy exports are lower than that of Sweden. One way for the Russian "democratically elected" dictatorship to maintain it's grip on power in the face of economic decline is to Wag the Dog (from the famous 1997 film). That is we are likely to see Russia get entangled in another conflict such as the one with Georgia to "rally" the people in nationalistic fervor. And the longer oil prices stay subdued, the more antagonistic the Russian leadership will become. The Obama administration will have it's hands full.